WASHINGTON (WTXF/AP) - The threat from President Donald Trump to tax Mexican-made cars sold in the U.S. would throw the industry into disarray, analysts say, forcing some uncomfortable choices: Raise car prices or swallow the cost. Stop selling Mexican-made cars in the U.S. but risk losing customers. Move production to the U.S. but make less money.
"I don't think the auto industry would turn up its feet and die, but it would be a terrible shock. It would create mayhem with their profitability," said Marina Whitman, a business professor at the University of Michigan and a former vice president at General Motors Co.
Before he was to host a breakfast meeting early Tuesday with the heads of General Motors, Ford Motor Co. and Fiat Chrysler Automobiles, Trump demanded on Twitter that automakers they build new factories in the U.S. "I want new plants to be built here for cars sold here," his tweet said. He has warned of a "substantial border tax" on companies that move manufacturing out of the country and promised tax advantages to those that produce domestically.
For more than two decades, Mexico has been an oasis for the auto industry, offering cheap labor and access to dozens of markets through free-trade deals. Whitman says Detroit automakers can't build small cars profitably in the U.S., where a unionized auto worker can make $58 an hour in wages and benefits. By comparison, a Mexican auto assembly worker makes a little more than $8.
That helps to explain why automakers have announced $24 billion in Mexican investments over the last six years, according to the Center for Automotive Research, a Michigan think tank. In all, $50.5 billion in vehicles and $51 billion in auto parts were shipped to the U.S. from Mexico in 2015, U.S. government data show.
Mexico's auto sector, while still smaller than the U.S., is growing at a faster clip. Mexico's vehicle production capacity is expected to rise 49 percent to 5.5 million vehicles by 2023, according to LMC Automotive, a forecasting firm. U.S. capacity will grow 13 percent to 14.2 million vehicles in the same period.
But Trump could change that. In frequent tweets targeting the auto industry, he has proposed both a 35-percent tariff on Mexican-made imports and a "border tax," which would tax companies' imports. That's forcing automakers to consider a number of options.
STAY THE COURSE
Abandoning Mexico and moving production to the U.S., as Trump demands, would cost the industry billions and scuttle plans that are years in the making. Audi, for example, just opened a plant in Mexico that it decided to build five years ago.
"It's very difficult to turn on your heels quickly in the auto industry," said Laurie Harbour-Felax, a manufacturing consultant and president of Harbour Results Inc.
In recent weeks, Volkswagen, GM, Toyota and BMW have all said they won't shift their production plans, while stressing the amount they've invested in the U.S. BMW, for example, said it's proceeding with a $1 billion plant in Mexico that will make the 3 Series sedan starting in 2019. The German automaker also noted that its SUV plant in South Carolina is its largest plant worldwide.
Trump's border tax would hurt some automakers more than others. Volkswagen, for example, imports 32 percent of the vehicles its sells in the U.S. from Mexico, according to LMC. But Honda imports just 11 percent, and that's expected to fall this year after it moves production of the CR-V SUV from Mexico to Indiana.
PIVOT ON PRODUCTION
In early January, Ford made the surprise announcement that it would halt construction of a $1.6 billion plant in Mexico slated to build the compact Focus. It also announced plans to invest $700 million of that savings into a Michigan plant where it will make new electric and autonomous cars.
Ford said declining sales of small cars, not Trump, influenced the Mexico plant decision, and the company will still make the Focus in Mexico at a different plant. But Ford CEO Mark Fields noted that Trump's promise to lower corporate taxes and ease regulations would make it more attractive to do business in the U.S. Fields also said he's not worried about the possibility of tariffs
Others appear more nervous. Speaking to reporters at the Detroit auto show, Fiat Chrysler CEO Sergio Marchionne said his company might withdraw from Mexico altogether if tariffs got too high.
"Those plants were designed, built and purposed at a time when NAFTA was alive and well," he said. "It's one of the perils associated with the business that we run."
Trump can't place tariffs on companies or groups of companies without congressional approval, says Gary Hufbauer, a senior fellow at the nonpartisan Peterson Institute for International Economics. But he could fashion tariffs that hurt some companies more than others by, for example, picking and choosing from the dozens of import classifications for vehicles and parts.
Automakers could stop selling some Mexican-made cars in the U.S. altogether, but that would cost them customers. They could also try to sell the cars elsewhere.
Mexico has free trade agreements covering 45 countries, including agreements with the European Union, Japan and South America. By comparison, the U.S. has agreements with 20 countries.
Nissan Motor Co., the biggest producer in Mexico, made more than 823,000 vehicles in the country in 2015. Forty-six percent were shipped to the U.S., but another 17 percent went to other countries, including Canada and Saudi Arabia. Nissan could tweak those numbers if U.S. tariffs were prohibitive.
"All carmakers will adapt to the new rules, if there are new rules," Nissan CEO Carlos Ghosn said this month in Detroit.
PASS THE COST
If Trump imposes tariffs, automakers could try to pass along the cost to U.S. customers. But that would raise the price tag of cars like the $17,000 Nissan Sentra or the $21,000 Chevrolet Trax by thousands of dollars.
Even a U.S.-built vehicle like the Toyota Camry would cost more. Jim Lentz, CEO of Toyota North America, said 25 percent of the Camry's parts are imported, and tariffs on those parts would add roughly $1,000 to the cost of the car.
Automakers could swallow the cost of the tariff, but it would hurt their bottom lines.
Dustin Blanchard, 31, who works for a software startup in Austin, Texas, drives a 2007 Nissan Sentra that he bought for $18,000. His car was made in Mexico, but he didn't think much about that when he bought it.
"The parts all come from everywhere. Domestic brands are made overseas and Japanese cars are made here," he says. "It's so interconnected that you don't feel like it's a patriotic duty to buy a Ford or something."
But a 35-percent tariff would have added $6,300 to the cost of his Sentra, which would have put it out of his reach.
Blanchard has thought more about NAFTA's impact since the election. When he recently drank a Mexican Coke, he says, he half-joked that he better enjoy it while he can.
"It's something I had taken for granted, that free trade was here to stay," he says.
President Donald Trump said he was protecting jobs as he officially pulled out from the proposed Trans-Pacific Partnership trade deal.
But his ability to help the U.S. economy might depend on whether Trump can strike better deals on his own.
Most analysts say the 12-nation agreement, the product of years of negotiations during the previous administration, would have reduced prices and boosted sales abroad for automakers, farmers and tech companies.
But Trump vowed on Monday that he could do better. Riding a tide of worries about job losses and suspicion of such sweeping agreements, the businessman who wrote "The Art of the Deal" sold himself as a sharper negotiator than his predecessor. He now plans to shun multinational deals and begin focusing on one-on-one agreements with other countries.
White House spokesman Sean Spicer told reporters that the decision to abandon TPP "ushers in a new era of U.S. trade policy in which the Trump administration will pursue bilateral trade opportunities with allies around the globe."
The Trump administration hasn't spelled out many details about how it would structure these new trade deals to create and keep jobs. Anchoring his trade team would be Wilbur Ross, the billionaire investor in distressed companies who is Trump's commerce secretary nominee; lawyer Robert Lighthizer, the U.S. trade representative nominee; and economist Peter Navarro, a fierce critic of China who would lead a new White House council on trade.
The White House has said it believes it is easier to negotiate bilateral agreements on equal terms, instead of a multinational pact such as TPP where a group of smaller counties can more easily exert their will. Of course, the challenge with bilateral trade deals is that the Trump administration would have to complete far more negotiations and the final rules might not be uniform.
Mastering arcane details about labor standards and domestic goods could determine whether Trump can deliver on his promise. Trump could bargain for protections for workers that could be undermined by other sections of the agreement that give companies incentives to move abroad, said Lori Wallach, director of Public Citizen's Trade Watch and an opponent of TPP.
"You could do half of it right and still end up with the result you don't want -- more offshoring," Wallach said.
But Wallach stressed that voters will be able to measure Trump's performance in monthly government reports about employment and trade-- the best way to see firsthand if he fulfills his pledge to increase factory jobs and reduce the trade deficit.
The first test of that new approach will come early.
Trump is slated to meet Friday with British Prime Minister Theresa May, who is coming to discuss, among other things, Britain's departure from the European Union. The exit means May must begin negotiating new trade agreements that could reduce tariffs and give Britain the access to the markets it will lose by leaving the E.U.
But the far bigger test will be Trump's promise to renegotiate the North American Free Trade Agreement. The president also has early meetings planned with Canadian Prime Minister Justin Trudeau and Mexican President Enrique Pena Nieto, the NAFTA partners that account for 24 percent of U.S. imports.
Those negotiations could be tricky for U.S. workers because Trump's victory has led to a decline in the Mexican peso. The cheaper peso makes it more profitable for U.S. companies to relocate their operations to Mexico, a possible challenge for protecting workers.
Part of Trump's solution is to place a border tax as high as 35 percent on companies that move factories abroad and then sell back to U.S. consumers.
His focus on protectionism raises a concern among many trade experts, who say the savings from lower-cost imports get passed to consumers in the form of cheaper prices for cars, clothing and a range of other items.
"Protection is really bad," said Jeffrey Bergstrand, an economist at the University of Notre Dame. "We all lose from higher prices."
Saving factory jobs by amending trade agreements will prove especially difficult.
Foreign trade accounted for only 13 percent of lost U.S. factory jobs, according to a 2015 study at Ball State University's Center for Business and Economic Research. Almost all that decline came from automation as manufacturers needed fewer workers.
Trump has said little about the effects of automation, devoting much his time to meeting with prominent chief executives, as he did Monday before signing the order to end TPP. Trump also met with union workers in the afternoon to tout his rejection of the agreement.
Speaking to CEOs who included Kevin Plank of Under Armour, Wendell Weeks of Corning and Elson Musk of Tesla, Trump reiterated his plan to lower taxes and slash federal regulations in order for them to keep and create jobs.
But he also repeated a threat to tax any U.S. company that offshores jobs.
"If that happens, we are going to be imposing a very major border tax on the products when it comes in," Trump said.